Incorporating a Practice

Points for consideration and discussion:

  • Make sure you are earning money consistently and have used up all of your losses before you even consider incorporation.
  • The tax system is fair in that it attempts to tax all income equally, regardless of the form the income takes, e.g. dividends or salary.
  • Tax avoidance (not evasion) is not possible by incorporation. Few, if any, loopholes are left. The only benefit is tax deferral, e.g. bonus.
  • Financial Planning (e.g. RRSPs): You should be making the maximum possible RRSP contributions. Therefore, from a practical sense your practice should be generating at least $75,000 in profits before considering incorporation. Also, incorporation tends to encourage payment of dividends that are not eligible for the RRSP deduction limit.
  • Estate planning is usually one of the big benefits of incorporation. This is not the case under professional corporation (PC) rules, as all shareholders must be members of the profession.
  • Benefit of capital gains exemption of up to $500,000 on the sale of shares in a PC (if it is a CCPC – Canadian Controlled Private Corporation).
  • Income splitting via directors’ fees is not possible as directors/officers must be a shareholder.
  • There is no limited liability on practice front. Liability will be limited for such things as agreements signed in the PC’s name, e.g. leases (as long as a personal guarantee is not given).
  • If you do incorporate, there is the added burden (one time) of converting all agreements of the business into the name of the business. Failure to separate business and personal activities may result in the incorporation being deemed a sham and result in taxation at personal rates.
  • Activities of a PC are limited to the practice of the profession. Long-term investment is not permitted in PC (a holding company can make this possible, however).
  • Incorporation may result in a lower price for a practice if shares rather than assets are sold. Assets are depreciable (they can be written-off over time), whereas shares are not depreciable. The purchaser’s liability is also better defined if he buys assets.
  • It is unclear as to whether surpluses will be allowed to be carried in a PC.
    Additional costs: Incorporation $1,000. Extra tax return per year $250-$500.

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Content is for general understanding only.
Please seek legal advice regarding your specific matter.
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